CRISIL retains valuation grade of 5/5 to Sagar Cements

Sagar Cement BSE | NSE 30/05/12 Are Mutual Funds betting on Sagar Cement?

CRISIL Research has come out with its report on Sagar Cements . The research firm has initiated coverage on the company with a valuation grade of '5/5' and maintained the fair value of Rs 202 per share, in its July 13, 2011 report.

Sagar Cements Ltd's (Sagar's) Q1FY12 revenues and margins exceeded CRISIL Research's expectations. Sagar reported 2.5% q-o-q growth in Q1FY12 revenues. The higher realisation was a surprise and also helped the company to post a flat EBITDA margin of 23.5%. We expect cement prices to come under pressure given the oversupply in Andhra Pradesh (AP) and lower cement demand as construction activities in the infrastructure and residential sectors have slowed down. We maintain the fundamental grade of 2/5. In the wake of sustained higher cement prices, we may revise our estimates upwards after detailed discussion with the management.

Q1FY12 revenues grew by 2.5% q-o-q (32% y-o-y) to Rs 1,725 mn due to higher realisations that were up by 9.9% to Rs 4,659 (43.3% y-o-y). Sales volumes declined by 1% q-o-q (up 6.5% y-o-y). We had expected cement prices to decline; but production cuts led to an artificial price rise in south India. The absence of clinker sales during the quarter may be attributed to the merger with Amareshwari Cements Ltd (ACL), who used to buy clinker from Sagar earlier. The exposure to AP declined to 60% from ~77% in Q1FY11 as ~40% of cement dispatches were to markets outside AP. EBITDA margin remained flat q-o-q at 23.5% (up 1,374 bps y-o-y). Q-o-q increase in raw material and employee costs was offset by a decline in power and fuel costs (down 27.3% q-o-q). PAT margin declined by 91 bps q-o-q to 10.5% (increased 1,013 bps y-o-y) due to lower other income that declined by 95% q-o-q (86% y-o-y). Adjusted EPS for Q1FY12 is Rs 12.9. The company has recommended a final dividend of Rs 2 per share for FY11.

Key developments: Amareshwari Cements merger completed-  The merger of ACL with Sagar, which was approved by the AP High Court w.e.f. 1 April, 2011, has been finally completed. Pursuant to the scheme of amalgamation of ACL with itself, Sagar has cancelled 0.9 mn shares held by ACL as investments in Sagar. On 12 July, 2011 Sagar completed the merger by issuing 3.2 mn shares to ACL shareholders. Hence, the paid-up equity share capital of the company is Rs 174 mn as of date.

Valuations: Current market price has strong upside. We continue to value Sagar based on the sum-of-the-parts method. We maintain the fair value of Rs 202 per share and valuation grade of 5/5.

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